Latin American Economic Outlook

OECD Development Centre

The Latin American Economic Outlook is the OECD Development Centre’s annual analysis of economic developments in Latin America in partnership with UN ECLAC and CAF. Each edition includes a detailed macroeconomic overview as well as analysis on the dynamics shaping the region in the context of shifting wealth, particularly towards emerging economies. Each issue also includes an in-depth look at a special theme related to development in Latin America, taking into account the strategic challenges and opportunities the region will have in the future. Further information can be found on the website.

Contrary to prevailing wisdom, Latin American countries that opened their markets to international competition during the last decade have not been more vulnerable to the global economic downturn. The OECD Latin American Economic Outlook 2010 provides a fresh analysis of economic trends in the region with a particular focus on the role that international migration and remittances play in shaping the current context.

"Among the most interesting surprises by the global economic crisis: so far its impact on Latin America has been less than anticipated. This OECD report offers a clear analysis of the factors that explain this phenomenon." Moisés Naim, Editor in Chief, Foreign Policy

"This essential study shows that countries open to the international economy with serious fiscal and monetary policies were better prepared to confront this crisis. The reprot also explains, with realistic analysis, why why migration policies belong on the international agenda." Ricardo Lagos,former President of Chile

"This volume suggests that migration can help the development process provided that some interventions are adopted both in the sender and recipient countries." Mauricio Cárdenas, Senior Fellow and Director of the Latin America Initiative, Brookings Institution

"Policy makers, academics and others interested in Latin American will find here a serious and relevant contribution to advancing their own work." Santiago Levy,Vice President for Sectors and Knowledge, Inter-American Development Bank

The OECD Latin American Economic Outlook 2010 is released at a critical moment for Latin America and the Caribbean. On the heels of the first unambiguous contraction of GDP in 25 years, a considerable drop in foreign trade and investment and a surge in unemployment, the region’s economic outlook for 2010 is already substantially positive. However, the one million dollar question is to what extent Latin America’s economic pragmatism of the past decade will translate into the necessary stability to focus on the many development challenges the region faces in a still uncertain global economic scenario.

Latin America has not escaped the global economic crisis, but it has stood up to it with a new resilience. Every country in the region has suffered the effects of the downturn and overall gross domestic product is expected to shrink 3.6% in 2009. However, it is already apparent that Latin America is rebounding from the shock more rapidly than the majority of developed economies. Most importantly, it is doing so without compromising its significant progress towards its long-term development goals. The rate of recovery is expected to be substantial in 2010, even if short of the typical growth rates of over 5% that characterised the bonanza of 2004-08. The duration of the global recession will be only one factor in determining future growth rates and at least as important for each country will be its capacity to stimulate its economy through sustainable policy efforts. In many countries, moreover, changing patterns of international migration and remittances will also affect the depth of the crisis and the menu of available policy options.

"When the United States sneezes, Latin America catches a cold" is a familiar refrain. But what if the US economy has flu? If history is a guide the answer is unsettling. From July 1981 to November 1982 the United States experienced one of its two longest post-war recessions (the other started in November 1973 and also lasted 16 months). Recession quickly spread throughout Latin America. But – deep as those initial recessions were – the region’s real drama was just unfolding. While developed economies recovered in time and returned to their pre-crisis economic paths, Latin America fell into a debt crisis that led to a sharp reduction in potential growth. This drag on growth persisted for more than a decade – in some countries for a quarter of a century – and left lasting scars on Latin America’s income and development.

The task that this year’s Latin American Economic Outlook has set itself is to make clear the opportunities and risks presented by international migration – in both directions – to the societies of Latin America and the Caribbean. Doing so will identify what is at stake when setting policy for the governance of mobility of people. It will back this up with a review of policy tools and what has been learned from their use. It takes on this topic at a time when migrants increasingly find themselves at the centre of heated global policy debates. The long boom in the world economy has created ideal conditions for migration with labour shortages on the one hand and the promise of a share in new wealth on the other encouraging many to move. Sometimes these flows have been highly visible, sometimes less so. But they now amount to many millions since the world economy last paused.

Any discussion of international migration in Latin America must begin by answering two basic questions. First, how many Latin Americans are international migrants? And second, how much money do they send home in the form of remittances? Each of these raises new questions in turn. Where do migrants go, for example, and how have these patterns changed over time? What kinds of households receive remittances and how do they spend them? And, of course, it is not possible to begin to answer these without looking at questions of definition and measurement – even the definition of "migrant" is by no means straightforward. This chapter will address each of these points and provide the quantitative basis for the analysis in this Outlook.

Are the people flows described in the previous chapter a good or bad thing? The answer may depend on whose perspective you adopt. The costs and benefits of these migration flows can be assessed from the perspective of at least three parties: migrants themselves (the focus of the previous chapter), the countries to which they migrate, and their home countries. Economic research has been almost exclusively devoted to the second of these groups, the countries of destination, and particularly those that are OECD countries; to a lesser extent, studies have looked at migrants’ own experience. Furthermore, while a great deal has been said about the effects of remittances on development – a discussion reviewed in detail in the following two chapters – little has been said about the effects, economic and otherwise, of the outflow of 20-plus million people.

Improving an economy’s financial system matters for national growth and development (Levine, 2004; World Bank, 2007). Financial systems can provide information about investment opportunities and help to allocate productive capital in the economy. Moreover, financial development and capital mobilisation are interrelated since financial instruments facilitate the reallocation of investment towards higher return activities, with positive implications for growth (Acemoglu and Zilibotti, 1997). In sum, economic growth and poverty reduction go hand in hand with financial development.

In many Latin American and Caribbean economies low levels of domestic savings or underdeveloped private capital markets have made foreign lenders more reliable suppliers of capital than domestic sources. This chapter asks whether remittances could do something to improve this situation. There is an analogy to their microeconomic role discussed in the preceding chapter: receipt of remittances reduces the vulnerability of households, lessening the risk that they will fall into poverty when hard times hit the home economy. Likewise, inflows at the macroeconomic level which tend to be among the least volatile of foreign flows can make entire economies more stable. Do the actors in the capital markets in recipient countries – the government and major banks at least – take full advantage of the opportunities that an inward stream of remittances provides? Do rating agencies adequately take into account this benefit of remittance inflows when they calculate sovereign risk levels? In answering these questions it is appropriate to examine first how remittances affect the development of capital markets in emerging and developing economies. This chapter approaches this from two angles: first, the financial effect and, second, the impact on sentiment.

This Outlook appears at a time of change for international migration, and migration from Latin America and the Caribbean in particular. The European Union has in recent years been taking its first steps toward a European immigration policy; the 2008 Return Directive for irregular migrants discussed in Chapter 1 is one facet of this emerging policy structure1. At the same time, individual EU member states have pursued aggressive, and sometimes controversial reforms, including the Spanish assisted-return programme for legal migrants assessed in Chapter 3. France has established quantitative targets for the share of economic immigrants among all immigrants, and for expulsions of irregular migrants (some 30 000 a year). The Obama administration in the United States announced in April 2009 that immigration reform, stalled since 2007, would be a policy priority for the new president’s first year in office – despite competition from health care and energy reform and the need for measures to combat the economic crisis. As part of this, the administration signalled a commitment to make legal status possible for the unauthorised population (about which statistics were provided in Chapter 2).

Historically, Argentina has been a magnet for foreign workers, attracting the largest number of immigrants in the region (around 1.5 million people). European immigrants, principally from Italy and Spain, form the core of this historic migration, which was underpinned by the entry and integration measures provided by the Avellaneda Law (Act Nº 817 of 1876). The bulk of European migrants arrived in Argentina between 1890 and 1950, and their relative share of the population is in a steady decline.

Historically Brazil has been a country of destination, influenced by successive waves of immigrants. Some early initiatives as Decree No. 80 (1824) and governmental programmes providing grants for the travel costs of immigrants promoted the growth of communities of European migrants. The abolition of slavery in 1888 led the economy to experience a labour shortage, particularly felt in the coffee plantations. The legal response was Decree No. 528 (1890) which regulated the entrance of immigrants to Brazil, favouring European flows. Brazil’s main countries of origin at the end of the 19th century were Portugal, Italy, Spain and Germany.

For most of Chile’s history immigration flows have not been significant. Over the 138-year period 1865-2002 on average only 2% of the total population were foreign born (Martínez, 2003). What immigration there was came from groups affected by Europe’s economic plight at the end of the 19th century or by the two World Wars. European migration was directly encouraged by the state in order to populate and develop the local economies in uninhabited southern areas (Selective Immigration Law of 1845).

Throughout most of Colombia’s history immigration and emigration flows have been low compared to other Latin American countries. Nevertheless, economic factors and internal conflicts have driven extensive emigration of Colombians during recent decades. According to the latest round of the national census around 4.7% of the population live abroad (over 1.3 million people), most of whom are in Venezuela and the United States. Figures from the national statistics office put the figure higher, estimating that as a many as 3 million Colombians are resident in another country.

Immigration flows are not new in the history of Costa Rica. From the late 19th century the development of banana plantations became a major factor drawing in foreign labour, mainly from Nicaragua and Jamaica. From 1892 to 1973 the foreign-born proportion of the population remained between 2 and 6% (Flacso, 2002).

Historically, the Dominican Republic has been a country of destination. Starting in the second half of the 19th century, cane-cutters were recruited to work in Dominican sugar plantations, mainly from English-speaking Caribbean countries and Haiti. Labour immigration from Haiti was actively encouraged during the United States’ occupation of the Dominican Republic (1916-24), as a consequence of the expansion in the sugar industry under American rule.

Mexico embodies several dimensions of the migration process, being at once a country of origin, transit and destination. Yet, these flows are now dominated by the emigration of Mexicans to the United States. In the latest census round it was estimated that around 13% of Mexicans lived abroad, of whom around 8.3 million were in the United States. A more recent estimate (20087) in the American Community Survey put this figure at more than 11.4 million.

Historically Peru has been a country of destination, beginning with the establishment of Chinese, Italian and Japanese communities in the 19th and 20th centuries. The abolition of slavery in 1854 left the Peruvian economy with a labour shortage, especially in the sugar and cotton plantations and in mining. The first waves of Chinese and Italian flows were encouraged by the Peruvian government, under the Chinese Law (1849) and through the "European Immigration Society" (1872-76). During the first half of the 20th century the Asiatic community was consolidated by the arrival of migrants directly involved in trade and commercial activities.

In the preparation of the country notes, special attention was paid to data collection on migrant stocks. This has required processing of national census micro-data for a significant number of Latin American and Caribbean countries that are not members of the OECD. The model is the OECD DIOC database, a fundamental reference for OECD member countries backed by a consistent methodology. Extending the OECD DIOC methodology to Latin American and Caribbean countries will permit more transparent comparison of migrant stocks among Latin American economies, and between OECD and Latin American economies. Data on stocks of migrants in Latin American and Caribbean countries in this Outlook are taken from this new database. Those for OECD countries are from DIOC.